Should you say goodbye ELSS mutual funds, welcome new income tax slabs?

Most taxpayers are curious about the new flat personal tax rates introduced in the budget 2020. They want to figure out whether they should say goodbye to the old tax rates and opt for the new ones, foregoing all the deductions and exemptions currently available in the old system.

Most taxpayers are curious about the new flat personal tax rates introduced in the budget 2020. They want to figure out whether they should say goodbye to the old tax rates and opt for the new ones, foregoing all the deductions and exemptions currently available in the old system. This also includes investments in Equity Linked Saving Schemes (ELSS) that qualify for tax deductions of up to Rs 1.5 lakh under Seciton 80C. Malhar Majumder, Partner, Positive Vibes Consulting and Advisory, a Kolkata-based wealth management firm, addressed all these queries at the ET Wealth Investment Workshop held in Kolkata on February 28.

"According to the finance minister, the new tax regime provides significant relief to individual tax payers and simplifies Income Tax laws. It reduces income tax rates and foregoes certain deductions and exemptions. This all is to be understood by the investors before taking any call,” Majumder told the participants at the workshop.

He also told them that they should work with the exemptions and deductions claimed by them to calculate their current tax liability, and then compare the tax liability under the new personal tax regime before taking a final call on foregoing the exemptions and deductions for simplicity of taxation. Majumder offered different scenarios to the participants to prove that the advantage of the new tax rate is viable in some cases, whereas it is better to stick to the old system in some other cases.

For example, responding the most frequently asked question of does it make sense to forego Section 80C deduction investments in ELSS and opt for the new personal taxation, Majumder said, "If an individual is claiming only Rs 1.5 lakh rupees in Section 80C via ELSS, then the new tax regime makes sense for investors who earn less than Rs 9 lakh per year.” (See chart below)

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He also told the participants that the new personal income tax rates will cost the government revenue of Rs 40,000 crore per year. According to the finance minister, the new tax regime is optional for the taxpayers. “More than 100 deductions and exemptions are provided in Income Tax act out of which 70 stands removed in the simplified regime,” said Majumder.

Addressing the queries of the participants, Majumder explained to them which major deductions will stay and which will be gone if one chooses the new tax slabs. “In the new regime, you will have Section 115 BAC. But you will lose major deductions like Section 80C, 80D, standard deduction on salary, interest on house building loan,” Majumder said.

In the end Majumder gave a crux of who should and shouldn’t give up deductions for lower tax rates:

1.If NIL deduction is claimed, always opt for the new slabs
2.If only 80C is claimed, opt for new slabs if income is over Rs 8.5 Lakh
3.If 80C + 80D is claimed, opt for new slabs if income is over Rs 12.5 Lakh
4.Else, if you are taking more deductions, don’t opt for the new slabs.